While the reasons for converting an LLC to a nonprofit corporation vary widely, the most popular goal is establishing tax-exempt status with the IRS. As you begin the task of researching the conversion process, you will need to determine what you want your corporate entity to gain from the conversion, the possible negative or unforeseen consequences of converting, and what is involved in converting your LLC to a nonprofit corporation.
Determine your goal or goals for converting your existing LLC into a nonprofit corporation and decide how the conversion will achieve each goal. Evaluate if all goals will be met in the conversion, and what compromises, if any, you will need to make. If your sole reason for converting is to achieve tax-exempt status from the IRS, consult with a tax adviser to receive advice on the matter. Benefits of converting may include eligibility to receive grants or the ability to accept tax-deductible donations. Find out what additional reporting paperwork the IRS or your state requires of nonprofit corporations.
Determine your LLC’s eligibility to convert to a tax-exempt charitable organization that benefits the public, as 501(c)(3) nonprofit corporations do, or determine another nonprofit status that fits with your company’s goals. Maybe your LLC is a title-holding company, a cooperative service organization or a childcare organization. A lawyer, tax accountant or the IRS can help determine your eligibility.
Follow the procedures required by the state in which you formed the LLC. While the IRS grants the tax-exempt status, you must convert the entity through your state. Fill out the required paperwork and submit it to the correct state agency or agencies. Many LLCs do this through an attorney who takes care of all of the details involved in the conversion as well as issues specific to the situation. Also, your state may have specific rules regarding filing of annual statements or applicable franchise taxes.
Review information on the IRS website to learn more about your LLC’s eligibility, and the tax advantages and requirements for conversion. Review your state’s regulations and requirements for conversion. Consult with a lawyer, as well as a tax adviser or your existing CPA, to understand the details involved in an entity conversion of this type.
If your LLC is not eligible to convert to a nonprofit corporation, consult with a legal adviser to determine if dissolving the LLC and forming a new corporation is a viable option and how the transfer of assets would be handled.
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